"Medicare for All" Universal Health Care Would Not Solve the Problem of Rising Health Care Costs

by David Hogberg, Ph.D.

In mid-2006, the governor of Massachusetts, Mitt Romney, succeeded in passing his health care reform through the Massachusetts legislature. This ignited a debate on health care policy in the U.S. that shows no signs of subsiding. From the governors, to members of Congress, to presidential candidates, it seems that every politician and his brother has some type of health care plan. Newspapers, TV shows and the blogosphere are filled with discussion of health care reform.

In August 2006 , the Pew Research Center for the People and the Press found that 90 percent of respondents to an opinion poll viewed health care affordability as either a big problem or a very big problem.1 A more recent Pew survey found that 68 percent of respondents said reducing health care costs should be a priority for President Bush and Congress.2 Chances are good the health care issue will loom large in the public mind for the remainder of the decade.

The inevitable question: What type of health care policy should the U.S. pursue?

One proposal, popular among many on the political left, is “Medicare for All,” a proposal that would put most, if not all, Americans under the auspices of the government-run health insurance program for the elderly and disabled. Before the U.S. adopts such a system, it is important to evaluate the claims of the proponents of Medicare for All. This study addresses this by examining the three oft-repeated claims of Medicare for All proponents: 1) that Medicare for All will save on administrative costs; 2) that Medicare for All will provide quality care; and 3) that Medicare for All will be affordable.

Before addressing those claims, a brief description of Medicare and Medicare for All is needed.

Medicare and Medicare for All

Medicare is the government-run health insurance program that covers most Americans over age 65, those under 65 with certain disabilities, and those with permanent kidney failure. Established by Congress and President Lyndon Johnson in 1965, Medicare initially consisted of Part A, which covers hospital costs, and Part B, which covers doctor’s visits and other outpatient services. In 1997, Congress and President Bill Clinton created Medicare Part C, which allows seniors to receive their Medicare benefits through a private insurer. In 2003, Congress and President George W. Bush created Medicare Part D, which covers prescription drugs.

The bulk of Medicare is funded through a combination of payroll taxes and general revenues, with the remainder being funded through premiums, deductibles, and other out-of-pocket expenses. Medicare is administered by the Center for Medicare and Medicaid Services (CMS), formerly the Health Care Financing Administration. Although seniors can opt out of Medicare, to do so they must, under federal law, forego their Social Security benefits. At present, about 42.5 million beneficiaries are enrolled in Medicare, 35.8 million elderly and 6.7 million disabled.

Medicare for All would entail enrolling most, if not all, Americans in the same program that the elderly and disabled currently have access to. Most proposals would open Medicare to any American who wanted to join, while still allowing those Americans who did not want to join Medicare to purchase private insurance. Whether the government will provide funds for the purchase of private insurance is less clear.

For example, Senator Edward Kennedy (D-MA) states,

For those who prefer private insurance, we will offer comparable coverage under the same range of private insurance plans already available to Congress. I can think of nothing more cynical or hypocritical than a Member of Congress who gives a speech denouncing health care for all, then goes to his doctor for a visit paid for by the Federal Employees Health Benefit Plan.3

Under its Medicare for All proposal, the Medicare Rights Center says private insurers can “remain in the business of providing people with coverage so long as it is at least as good as Medicare offers, and they must compete.”4 While Medicare for All may not require every American to join Medicare per se, it will force private insurance to provide all customers with benefits similar to Medicare. In effect, every American will have coverage that is at least equal to that provided by Medicare.

Paying for Medicare for All will, naturally, require tax increases. According to Senator Kennedy, “As we implement this reform, financing must be a shared responsibility. All will benefit, and all should contribute. Payroll taxes should be part of the financing, but so should general revenues, to make the financing as progressive as possible.”5

The main reason that the political left wishes to dub its universal health insurance scheme Medicare for All is the belief that that naming the system after Medicare will make it more palatable to voters.

For example, liberal pundit Paul Krugman states:

A system in which the government provides universal health insurance is often referred to as “single payer,” but I like Ted Kennedy’s slogan “Medicare for All.” It reminds voters that America already has a highly successful, popular single-payer program, albeit only for the elderly.6

But how successful is Medicare? And, by extension, how successful would a system of Medicare for All really be? The remainder of this analysis examines the claims of Medicare for All proponents.

Administrative Costs

A popular argument among the proponents of Medicare for All is that it would save money by reducing the wasteful administrative costs of private insurers. According to the Medicare Rights Center, “Providing Medicare to all Americans will reduce the high administrative costs and waste of our current fractured health care system, saving an estimated $200 billion annually.”7 Other estimates put the savings as high as $300 billion.8 It is even possible, doing a rough calculation, to suggest that the savings could be over $440 billion.9

Whatever the number, it does appear that Medicare has lower administrative costs that the private sector. Depending on the estimate, administrative costs of private sector health insurance range from 15 to 24 percent. Those of Medicare appear to be much lower. According to the 2006 Medicare Trustees Report, Medicare’s administrative costs – administrative expenses divided by total expenditures – were only 1.8 percent.10

Yet comparisons of Medicare’s administrative costs to those of the private sector are often misleading, and accurate comparisons suggest that the savings on administrative costs of switching to Medicare for All are not as large as its advocates contend. In fact, it is likely that Medicare does not spend enough on administrative services, resulting in tremendous waste.

The Council for Affordable Health Insurance notes that many administrative costs that are included in private sector calculations are not included in Medicare.11 The omitted expenses include what it costs employers and the IRS to collect the payroll tax needed to fund Medicare; the salaries of members of Congress and their staff members who set Medicare policy (the salary costs of executives and boards of directors who set company policy are included in private sector administrative costs), and the salaries of the employees who run the Centers for Medicare and Medicaid Services and the costs of the buildings in which they work.

Even when those factors are accounted for, Medicare’s administrative costs are still only about 5 percent. Another overlooked factor is the cost of complying with Medicare’s regulations, which some estimates put at over 130,000 pages.12 The reason these costs are not included is that doctors and hospitals bear the cost of complying with Medicare’s regulations. As Sally Pipes of the Pacific Research Institute puts it, “It’s as if the IRS claimed the costs of our complicated tax code were limited to the agency’s processing costs, neglecting the hours that individuals and companies must spend complying with the law.”13

Another problem is that comparing Medicare to private sector health insurance is something of an apples-to-oranges comparison because Medicare serves only the elderly. As Stuart Butler of the Heritage Foundation notes, “a program serving predominantly retirees will necessarily spend more on benefits per enrollee than is typical in a plan serving primarily working-age people.”14 Instead of comparing administrative costs by using benefits paid, Mark Merlis of the Henry J. Kaiser Family Foundation compared per recipient. Comparing Medicare to Blue Cross/Blue Shield, he found that administrative costs of Medicare were only half as large as those of the private sector.15

Much evidence suggests not that the private sector spends too much on administration, but that Medicare spends too little. Medicare’s low administrative costs result in a colossal amount of waste. As will be seen in the section on quality below, Medicare spending per beneficiary varies widely across the United States. Yet there is much evidence that the areas that spend more do not see any improvement in health outcomes. It is reasonable to assume that such extra spending is wasted. The question is, how much?

A paper from the National Bureau of Economic Research examined this question using a variety of different variables. The researchers concluded that “nearly 20 percent of Medicare expenditures [are] spent for health care with no measurable survival benefit.”16 That means Medicare spent $75 billion in 2006 on care with no discernable health improvement.17 A rough calculation shows that if 20 percent of all non-Medicare health care expenses are wasted, the result would be $330 billion in waste.18

A final indication that Medicare does not invest enough resources in administration comes from a 2001 GAO report. That report surveyed a multitude of government agencies on various management issues. For the CMS, the GAO found it “was below the rest of the government in aspects of agency climate, the use of performance information, and especially, performance measurement.”19 It also found that CMS “had the lowest percentage of managers who reported having four of the five types of performance measures… asked about: output, efficiency, quality, and outcome measures.”20 Finally, CMS was “second lowest among agencies… surveyed in the percentage of managers who reported they were held accountable for results to at least a great extent.”21

Adopting a system of Medicare for All will not result in the amount of savings on administrative costs that advocates of such a system contend. Furthermore, much of the savings will be offset by increased waste. Undoubtedly there are many ways the U.S. health care system could reduce costs. Medicare for All is not one of them.

Quality

Will opening Medicare to all Americans ensure that all Americans will have access to quality care? Proponents of Medicare for All certainly push that argument. Representative Pete Stark (D-CA) claims his bill that opens Medicare to all would “provide all Americans with access to affordable, comprehensive, quality health coverage.”22 The Medicare Rights Center claims that, “We need a simple, cost-effective way to ensure every American has access to good affordable health care. The Medicare Rights Center believes this starts with expanding Medicare to all Americans who want it or do not have health insurance that is as good.”23

Quality can be defined in many different ways, depending on the context. For medical care, however, quality seems to mean two things above all else: Access to care and effectiveness of the care. How does Medicare measure on those two criteria?

On having access to a doctor, Medicare measures up to private sector care. Data from the Consumer Assessment of Healthcare Providers and Systems shows that 83 percent of Medicare beneficiaries had no problem finding a doctor or nurse they were happy with compared to only 72 percent of those with private coverage.24 A survey by the Center for Studying Health Systems Change shows that about the same percentage of doctors are taking all Medicare patients as privately insured patients, 72.9 versus 71.8 percent.25 However, over the last ten years that number has climbed slightly for privately insured patients while it has declined slightly for Medicare patients.

Medicare does not perform nearly as well on providing access to new technologies and procedures. Indeed, it is particularly slow at providing such access, even long after new technologies and procedures have proven effective. As Edmund F. Haislmaier wrote for the National Center for Public Policy Research in 2005:

An implantable cardioverter-defibrillator (ICD) is a credit-card sized pacemaker implanted under the skin that can correct the sudden onset of an irregular heartbeat and prevent cardiac arrest. While the Food and Drug Administration approved the first such device in 1989, it took Medicare until 2003 to expand access to ICDs, and then it still only expanded them to one-third of the recommended patient population.26

Colonoscopy is a procedure that screens for colon cancer and can prevent such cancer from occurring by removing precancerous polyps. Although colonoscopies were widely accepted and practiced by the late 1980s, Medicare did not give every beneficiary access to one until 2001.27

Nor is Medicare particularly good at covering preventive care:

While Medicare finally gave all beneficiaries access to a colonoscopy in 2001, it came with a catch. For those beneficiaries not at “high risk,” Medicare will only pay for one colonoscopy every ten years.28

Medicare covers cardiovascular screenings that check for cholesterol and other factors that put people at high risk for heart disease and stroke. Each beneficiary is eligible for a screening once every five years.29

Every Medicare beneficiary is eligible for a comprehensive preventive physical exam, but only once and only within the first six months of enrolling in Part B.30 Medicare calls this the “Welcome to Medicare” physical exam.

Private insurance is undoubtedly better at providing benefits. A report by the Joint Economic Committee of Congress stated, “Medicare has the least generous benefits package among leading forms of insurance. Medicare covers 56 percent of total health care expenses, while typical employment-based health insurance covers 70 percent.”31 Researchers Joseph Antos and Alfredo Goyburu calculated that the generosity of private insurance grew by 41.5 percent from 1977-1996, while the generosity of Medicare grew by only 22.2 percent.32

The preponderance of evidence also suggests that Medicare pays for much care that is ineffective. A significant percentage of Medicare recipients do not receive appropriate care. Many others receive care that provides little-to-no health benefit.

A look at the number of Medicare recipients that do not get appropriate care reveals a grim picture. Examining 22 measures of inpatient and preventative care for Medicare patients by state, one study found that the median score was only 73 percent – that is, in half of the states, 73 percent or fewer of Medicare patients receive appropriate care.33 This was an improvement over a previous study that found a median score of only 69.34 A study by the Journal of the American Medical Association found that on twenty-two of thirty-seven indicators of necessary care, at least one in five Medicare patients did not receive the necessary care.35

The situation is not much brighter for Medicare recipients receiving care that does not improve health. One study notes that the “difference in lifetime Medicare spending between a typical sixty-five-year-old in Miami and one in Minneapolis is more than $50,000, equivalent to a new Lexus GS 400 with all the trimmings.”36 Yet the research is strongly suggestive that such extra spending is not effective.

In fairness, some research has found that higher Medicare spending does lead to better outcomes. For example, one study found that Medicare recipients with cancer who received less intensive hospital service were more likely to die in the hospital than those who had more intensive treatment.37 Another study found that for heart attack patients in Medicare, the seven-year survival rate was more than six percent higher for those patients receiving more invasive care than those who did not.38

Yet much research comes to opposite conclusions. In a two-part study on the regional variations of Medicare spending, researchers found some rather surprising results. In the first part, the researchers discovered that the “quality of care was no better in higher-spending regions, and access to care was slightly worse on most measures.”39 Part two of the study examined the effect of spending on health outcomes and patient satisfaction. The research “found no evidence to suggest that the pattern of practice observed in higher-spending regions led to improved survival, slower decline in functional status, or improved satisfaction with care.”40

It is possible, of course, that areas with higher Medicare spending do not have better outcomes because the population is in worse health. In other words, the higher spending is caused by sicker people. However, this largely does not appear to be the case. A study that examined this using sophisticated methodology found that higher-risk patients explained just over a quarter of the regional differences in Medicare spending.41

The research shows that it is not need that drives higher spending, but rather availability of resources. A study from the mid-1990s found that “a higher availability of acute care beds is consistently associated with increased [hospital] admission rates.”42 A later study found that Medicare recipients in areas with more hospital beds were up to 30 percent more likely to be hospitalized, and that the “increased use [of beds] provides no detectable mortality benefit.”43 The two-part study on regional variations in Medicare spending mentioned above also attributed the difference to medical specialists, suggesting that in higher-spending regions Medicare recipients were more likely to be referred to a medical specialist because of the greater availability of such specialists.

While the effectiveness of much of the care provided under Medicare is dubious, how does it compare to the private sector? It is an important question, since private insurers reimburse health care providers at a higher rate than Medicare. However, answering that question is difficult because, first, there are not enough Americans over 65 with non-Medicare coverage to provide a comparison group for study, and, second, the Medicare population tends to be older and sicker, making comparisons with the rest of the population problematic. Nevertheless, a few studies have examined this question, yielding mixed results.

One study found few differences in the treatment received by diabetics on Medicare versus those with private insurance.44 By contrast, an examination of four hospital patient safety indicators found on three of the indicators outcomes were better for patients with private insurance than those with Medicare.45 Finally, another study found that Medicare patients were at higher risk for an artery blockage and respiratory failure following bariatric surgery than patients with private coverage.46

Medicare for All is likely to provide a health care of inferior quality. It will be slow to pay for new technologies and will pay for much care that is ineffective. If we want a future of quality health care and continuous medical innovation, then Medicare for All is not the path we should take.

Affordability

Looking over the speeches and press releases of the advocates of Medicare for All, the word “affordable” appears again and again. Representative Stark says that his legislation will “provide all Americans with access to affordable, comprehensive, quality health coverage.”47 Senator Kennedy states that the battle to win Medicare for All is “the battle to make health care affordable and available to all our people.”48 Presumably, they believe Medicare for All would be more affordable than our current system.

Our current health care system does seem to be increasingly unaffordable. Since 1999, premiums for private insurance have risen an average of 9.9 percent annually, far outpacing inflation and forcing many employers to drop insurance coverage.49 From 2000-2005, health care expenditures as a percentage of gross domestic product (GDP) grew from 13.8 percent to 16 percent, a total increase of 16 percent.50 As a percentage of GDP, private health insurance grew 19.6 percent during that period, while total private spending (private insurance plus out-of-pocket spending) grew 13 percent. A recent report from CMS stated that by 2016 health care expenses would account for 20 percent of GDP.51 Health care costs, it seems, are exploding.

Would Medicare for All control them? Senator Kennedy certainly thinks so. He states that Medicare for All,

will be financed by a combination of payroll taxes and general revenues. Eighty-five percent of the financing will come from payroll taxes and 15% from general revenues. A preliminary estimate of the payroll tax financing necessary will be a payment of 7% of payroll by businesses and 1.7% by workers. By comparison, businesses providing coverage today spend an average of 13% of payroll to cover their workers.52

Thus, it seems a payroll tax of 8.7 percent would provide Medicare coverage for all. However, as the press release makes clear, that is only to add everyone under 65 to Medicare. If the 3.2 percent payroll tax already in effect that pays for beneficiaries over 65 is included, the total payroll tax for Medicare would be 11.9 percent. Furthermore, it’s not clear where Senator Kennedy gets the figure of 13 percent of payroll for businesses that provide coverage. The most recent Employee Benefit Compensation Survey found that all insurance benefits (health, life, and disability) paid by business amounted to 8.1 percent of compensation.53

There seems to be little in the way of cost savings in Medicare premiums, either. Table 1 shows the annual increases since 1999 for the premiums that recipients pay for Part B of Medicare (Part A does not charge premiums).54

Medicare premiums have fared only modestly better than those of private insurance, rising an average of 8.9 percent from 1999-2007. It is doubtful that even that modestly slower rate of increase will endure in the future. The small premium increases of 1999 and 2000 were due to cost controls put on Medicare in the 1997 Balanced Budge Act, controls that clearly did not last. Second, the slower rate of increase in 2007 is largely accounted for by the fact that the Bush Administration decided to cover a larger part of Part B costs with general revenues. Had Part B costs been covered by an increase in premiums, then premiums would have increased over 11 percent in 2007.55 For 2008, premiums are predicted to rise 17 percent.56

While Medicare fails at keeping premiums costs down, it is also consuming a larger portion of GDP. From 2000-2005, Medicare’s share of GDP grew 17 percent.57 That’s less than the 19.6 percent of private insurance, but higher than 13 percent of total private spending, which includes out-of-pocket payments.

The fiscal future of Medicare itself is bleak. The Medicare Trustees report notes that, by 2018, revenues for Part A will only be sufficient to cover 80 percent of its costs. By 2080, revenues will only cover 29 percent of costs. “Closing deficits of this magnitude,” the report warns, “will require very substantial increases in tax revenues and/or reductions in expenditures.”58 The prospects for Part B and Part D are not much better, with the report stating that revenues for those parts will “have to increase rapidly to match expected expenditure growth under current law.”59 From 2005-2080, the report predicts, Medicare’s share of GDP will rise from 2.7 percent to 11 percent.

Why anyone would want to put every American in a program that is already nearing fiscal collapse is perplexing, to say the least.

Proponents of Medicare for All would probably respond that savings would be achieved by reducing administrative costs. As shown above, such savings are dubious. It is also important to note that administrative costs are one-time savings. That is, the administrators that are not longer needed are let go only once; continuous savings are not achieved by removing administrators every year.

Reducing administrative costs does nothing to solve the main driver of Medicare’s costs, which is that Medicare is a third-party payer system. This means that a third-party, in this case the government, pays for most of the care health care professionals provide. Patients believe “someone else” is paying the bill. As a result, they have little incentive to restrain their demand for health care. This leads to an ever-rising demand for health care, and rising demand leads to higher costs.

Early research failed to confirm that Medicare was responsible for rising health care costs. Rather, it laid the blame for rising health care costs at the feet of technological advances.60 New research from Professor Amy Finkelstein of the Massachusetts Institute of Technology, however, suggests that Medicare is more culpable than initially thought.

Finkelstein realized that Medicare’s effect would not be uniform across the country. Rather, it would have a greater effect on total health care spending in regions where few seniors had private health insurance before the introduction of Medicare, and a lesser effect on regions where many seniors had health insurance. Controlling for regional differences, she found “that the introduction of Medicare is associated with a 37 percent increase in hospital spending over its first five years.”61 Using a “back of the envelope” calculation, she estimates that the “overall spread of health insurance may therefore be able to explain half of the six-fold increase in real per capita health spending” between 1950 and 1990.62 Much of the spread of health insurance can be attributed to Medicare since “Medicare’s introduction constituted the single largest change in health insurance coverage in American history.”63

Since Medicare contributes heavily to rising health care costs, it would only be a matter of time before the cost of Medicare for All exceeded any savings from lower administrative costs, leaving us where we are today with health care costs consuming 16 percent of GDP. To see how long that would take, the amount of health care costs for 2005, about $1.98 trillion, was reduced by the largest estimated amount of administrative cost savings, $440 billion (see section on administrative costs above). That number was then increased annually by average growth rate of Medicare over the last decade, seven percent. GDP was increased annually by the average growth rate of GDP over the last decade, 3.2 percent. The results are presented in Table 2.

Table two shows that it takes only eight years, until 2013, before health care expenditures again reach 16 percent of GDP.

For a variety of reasons health care costs under Medicare for All will almost surely reach 16 percent of GDP much faster. First, the $440 billion figure of administrative costs savings is almost surely too large, as the section in this paper on administrative costs shows. Second, under Medicare for All, the uninsured will have greater access to health care, and since the government will be perceived as paying for it, they are far more likely to use it, leading to an increase in demand for health care. Third, those individuals with high-deductible insurance policies will now be forced into an insurance program with either much lower deductibles or no deductibles at all. They, too, will now have incentive to increase their demand for health care resulting in upward pressure on costs.

The current Medicare system is ineffective at reducing health care costs. Indeed, it is a major cause of the escalation of such costs. There is no reason to think that Medicare for All would be any different.

Conclusion

In a recent article in the New York Review of Books, Paul Krugman and Robin Wells state that “the obvious way to make the U.S. health care system more efficient is to make it more like the systems of other advanced countries, and more like the most efficient parts of our own system… the core of the system would be government insurance – ‘Medicare for all.’”64 The problem with this analysis is that Medicare isn’t one of those efficient parts.

Medicare is ineffective at controlling costs. Wasteful spending is a particularly acute problem, leading to as much as one dollar in five being spent on health care that is of no value and possibly harmful. This stems from the fact that Medicare is largely a third-party payer system, insulating patients from the cost of their care and thereby shielding them from the need to make decisions about what care is necessary.

Putting all Americans under Medicare would not solve this nation’s problem of rising health care costs.

David Hogberg, Ph.D. is a health care policy expert and former senior fellow and senior policy analyst at the National Center for Public Policy Research.

8 Jessica Martin, “Medicare-for-All is the Prescription for Taming Health Care Costs, Says Insurance Expert,” Washington University in St. Louis News and Information, April 6, 2005, found at http://news-info.wustl.edu/news/page/normal/4981.html as of February 26, 2007.

9 To get the $440 billion figure, I took what the U.S. currently spends on administrative costs and subtracted from that the estimated amount that U.S. would spend should it switch to a system of Medicare for All. I started with the amount the U.S. spent on health care in 2005, $1.98 trillion. I multiplied that by the estimated amount that was spent on administrative costs, about 24%, which yields $475 billion. I then multiplied the amount spent on health care by the amount spent on administrative costs for Medicare, about 1.8%, which yields $35 billion. Subtract $35 billion from $475 billion yields $440 billion. The figure for U.S. health care expenditures from Aaron Catlin, Cathy Cowan, Stephen Heffler, Benjamin Washington, and the National Expenditure Health Accounts Team, “National Health Spending in 2005: The Slowdown Continues,” Health Affairs, January/February 2007, Vol. 26, No. 1, pp.142-153. The figure of 24% spent on administrative costs calculated from figures in David U. Himmelstein, Steffie Woolhandler, and Sidney M. Wolfe, “Administrative Waste in the U.S. Health Care System in 2003: The Cost To The Nation, The States, and The District of Columbian, With State-Specific Estimates Of Potential Savings,” International Journal of Health Services, 2004, Vol. 34, No.1, pp.79-86. For figure on Medicare’s administrative costs, see endnote 10.

15 Mark Merlis, “The Federal Employees Health Benefits Program: Program Design Recent Performance, and Implications for Medicare Reform,” The Henry J. Kaiser Family Foundation, May 2003, found at http://www.kff.org/medicare/6081-index.cfm as of August 31, 2006.

25 Center for Studying Health System Change, “Physician Acceptance of New Medicare Patients Stabilizes in 2004-05,” Tracking Report, No. 12, January 2006, found at http://www.hschange.com/CONTENT/811/811.pdf as of Febraury 22, 2007.

54 The choice of 1999 as the starting date is not arbitrary. In the 1997 Balanced Budget Act, Congress shifted a number of expenses in Part A into Part B starting in 1999. This makes comparisons of years prior to 1999 with 1999 and years thereafter problematic. Data on expenditures from Medicare Trustees reports. Data on deductibles from various CMS’ press releases.

64 Paul Krugman and Robin Wells, “The Health Care Crisis and What to Do About It,” New York Review of Books, Vol. 53, No. 5, March 23, 3006, found at http://www.nybooks.com/articles/18802 as of August 31, 2006.